When Saba Capital attempted to oust the boards of seven UK investment trusts, it highlighted that one of the reasons it did so was because of their widening discounts. This is not just an issue for individual investment trust companies, but for the sector.
Quill PR asked Peter Hewitt, fund manager of CT Global Managed Portfolio Trust, his thoughts on why discounts in the UK investment trust sector have widened over the past couple of years and what can be done to close them.
Peter Hewitt, Fund Manager of CT Global Managed Portfolio Trust, commented: “When it comes to investment trust discounts, I think we need to understand why it’s become such an issue. The UK economy hasn’t grown as fast as it could and, coupled with the rise in inflation and interest rates, there was an absence of buyers which did not supply demand for shares – so of course discounts for certain trusts were going to widen. In 2021, the average sector discount was at 2%, and over the last few years it increased to 16%. But there’s not a lot you can do to about this – it’s not easy to fight against important macro trends.
“However, the boards and management of investment trusts now have to be rigorous in closing the discount gap and issue share buybacks. In the past, they have been reluctant to do so due to fears that it will drastically shrink the size of their trust, to the point that private wealth managers might not be interested in them if they are too small but if more investment trusts did this, yes, it may shrink and the investment trust sector may well be smaller, but they’ll keep shareholders happy and ensure that they have right rating and a better share price.
“The increase in AUM (Assets Under Management) targets for wealth managers has significantly reshaped the investment landscape. With the amount moving from £100m to around £500m, smaller investment trusts and niche funds often struggle to gain traction with larger wealth managers and institutional investors.
“In order for share buyback policies to make a difference, they would need to make sure that the quantum of the buybacks is materially different and not just one-offs. With this in place there would be a lot less discount volatility, which would arguably be more attractive for potential buyers such as private wealth managers and multi-asset funds.”
Perhaps in the fullness of time, we might thank Saba Capital for highlighting the widening discount in the UK investment trust sector. However, for now the boards of investment trust companies must look to closing the discount gap and ensure that their shareholders are happy.
Having put forward proposals to seven UK investment trusts during December 2024, Saba Capital called for a general meeting with each of the Boards to decide their fate. These investment trusts include: Herald Investment Trust, Baillie Gifford US, CQS Natural Resources Growth & Income, European Smaller Companies, Henderson Opportunities Trust, Keystone Positive Change and Edinburgh Worldwide.
Following Edinburgh Worldwide’s general meeting on Friday 14 February, all seven of the investment trusts have rejected Saba’s proposal to oust the current Board and replace them with Saba appointed directors in what has been considered a record voter turnout at each general meeting.
And now, the further announcement from Mind the Gap campaign of Saba’s intention to requisition the Boards of CQS Natural Resources, European Smaller Companies, Middlefield Canadian Income and Schroder UK Mid Cap to propose to transition each of these trusts into an open-ended structure to eliminate the discount.
This has been considered one of the biggest shake-ups in the UK investment trust sector.
Quill PR has asked the opinions of some of the leading investment trust managers and commentators: Ben Conway, Head of Fund Management & CIO of Hawksmoor Investment Management; Peter Walls, Fund Manager of Unicorn Asset Management; and Peter Hewitt, Fund Manager of CT Global Managed Portfolio, on why this happened and why it’s important.
Question 1: Do you think that UK investment trusts can learn from this, and is there a way to protect against such aggressive strategies?
Ben Conway, Head of Fund Management & CIO at Hawksmoor Investment Management commented: “Yes, there is plenty both Boards and investment advisers (managers) can learn from this. The best way to prevent activists like Saba from appearing on one’s register is to prevent the opportunity from appearing in the first place. Discounts, even on portfolios of liquid securities, had become too wide and too persistent. Boards should have been enacting more measures to narrow discounts. The most obvious of these are share buybacks – which should have been enacted sooner and in greater size. I would not look too kindly on any reactive initiatives designed to prevent activist shareholders from appearing on registers. Any changes should benefit all shareholders – and close discounts by increasing demand. Anything that attempts to exclude a certain type of investor from a register is not good governance. The analogy we like to use is the wasp. No one wants a wasp at their picnic, but without them, our ecosystem collapses. Activists are an essential part of a healthy investment trust ecosystem: they provide discipline.”
Peter Walls, Fund Manager of Unicorn Asset Management, said: “Saba’s ultimate strategy will only become clear towards the end of this saga but so far it looks like a hybrid model. Traditional activists and arbitrageurs look to buy as many shares as possible at the widest possible discount and then agitate for change. It’s been going on for decades, aided by the development of ever more sophisticated and liquid financial instruments.
“Of course, the best way to protect against such strategies is not to let your shares trade at a tantalising discount in the first place and to ensure that your shareholders remain loyal when times get tough. Neither of these tasks are always particularly easy as markets, investment styles and investor sentiment are all cyclical. And for Investment Companies with illiquid underlying investments the challenge is often greater (although the potential for arbitrage may be less).
“I’m not inclined to support the idea of introducing protections against certain large investors as that would go against the whole idea of shareholder democracy.”
Peter Hewitt, Fund Manager for CT Global Managed Portfolio, commented: “Firstly, I think it’s important to note that this was not an attempt by Saba Capital to help improve the trusts and help close the discount. This was more of an attempt to gain the management of these trusts. They had no support in this endeavour by anyone outside of their organisation as it was pretty clear that their proposal would benefit no one but Saba.
“To prevent this kind of action from happening in the future, investment trusts will need to close the discount gap. The Board of Directors and management must be more alert about their trust’s discount and be more rigorous in closing it. It is true that the discount in the investment trust sector has widened quite a bit, which formed the basis of Saba’s proposal. In 2021, the average sector discount was at 2% and now it is at 16%.”
Question 2: How do you think the investment trust industry will change?
Ben Conway, Head of Fund Management & CIO at Hawksmoor Investment Management commented: “ ‘Relevancy’ is the watchword for us. Is the trust relevant? Trusts that lack relevancy will not see demand for their shares return and thus the current crisis is existential for them. Ultimately, a Board needs to be sure that the trust is offering something that cannot be offered in other forms. The most obvious type of trust at risk is that which invests predominantly in liquid listed equities. Such a strategy can be replicated in daily dealing in open-ended fund form (offering greater liquidity to the investor without the discount volatility of trusts). The use of gearing is not sufficient to justify their existence. We believe the trust structure is best utilised to access less liquid securities – both smaller listed equities and assets such as property, infrastructure, ships and private equity to name a few.”
Peter Walls, Fund Manager of Unicorn Asset Management, said: “The sector has faced so many headwinds in recent years (I think we are all familiar with these!) that change was already afoot as referenced by the record share buy-backs and other corporate actions seen in 2024. This trend has continued into 2025 with announcements of more rigid discount controls (Finsbury Growth & Income for example), redoubled share buy-back activity (Harbour Vest Global Private Equity) and other measures to dampen discount volatility.”
Peter Hewitt, Fund Manager for CT Global Managed Portfolio, commented: “The industry will have to cross the Rubicon and realise that their trust will become smaller if they want to close discounts and ensure their shareholders are happy. To do this, they will have to issue share buybacks.
“To make a difference to discounts, the quantum of the buybacks must be materially different and not just one-offs – you can make a difference on discounts through sensibly managed buyback policies. Not a lot of trusts want to do this because it will shrink the trust and they fear that private wealth will not be interested in them if they are too small. But what they have to realise is that it’s necessary if they want to keep their trust and get the right rating and share price.
“If this was taken onboard, you would have a smaller sector but there would be a lot less discount volatility, which would arguably be more attractive for potential buyers such as private wealth managers and multi-asset funds. Saba has thrown a light on this which we might be thankful for in the fullness of time.”
Question 3: Saba claimed that the UK investment sector is broken, do you think they’re correct in this?
Ben Conway, Head of Fund Management & CIO at Hawksmoor Investment Management commented: “I don’t think “broken” is the right word. I would say “in crisis” – but the challenges the sector faces aren’t insurmountable. Demand for investment trust shares is impaired as a result of three main headwinds: cost disclosure rules, wealth management consolidation and sub-standard governance. Whether the sector is in cyclical or structural decline is largely academic if the cycle takes too long to turn up! I think there is a deep pool of potential demand that should be marketed to with far greater alacrity (except for a few investment managers who I know are at the vanguard of such initiatives) – and that is the DC pension fund industry. The trust structure is in many ways superior to the LTAF in accessing illiquid assets. It would be a shame if DC pension funds invested only in LTAFs to access such assets. Even then, LTAFs could and perhaps should invest in investment trusts. Either way, demand from traditional cohorts of investors has collapsed and will not return soon. If it is not replaced, the supply side will have to do the work, and that means shrinkage.”
Peter Walls, Fund Manager of Unicorn Asset Management, said: “Absolutely not. Leaving aside that the sector has stood the test of time through every possible conceivable scenario the Investment Company structure remains that most appropriate corporate entity for long term investment, particularly in less liquid specialist areas of investment. Those willing to take a truly long view have been well rewarded by investing in the sector and I have every confidence that will continue to be the case.”
Peter Hewitt, Fund Manager for CT Global Managed Portfolio, commented: “I think that it is obvious as to why Saba would think that. Inflation and interest rates were rising and there was an absence of buyers, which could not supply demand for shares, so of course discounts for certain trusts were going to widen. But there’s not a lot you can do to combat this, it’s not easy to fight against pretty important macro trends. However, I wouldn’t say that the UK investment sector is broken, but it could improve in some areas.
“Aside from closing the gaps on discounts through continuous share buyback options, I think that Boards need a better understanding of the investment trust structure. Because investment portfolios invest in a whole variety of areas, such as equities, bonds, commodities etc. they are all wrapped up and called investment trusts. Whilst the Boards of investment trusts want to do the right thing generally, they often have expertise in many different investment areas but lack expertise in the management of the investment trust structure. Expertise in this area is paramount as they would be able to make more effective decisions to run the investment trust, such as the use of marketing strategies and how to handle discounts.”
Question 4: AIC has launched its ‘My Share, My Vote’ which seeks to end poor practices among some investment platforms and providers, such as failing to pass on voting rights and information, charging customers to vote, and declining to vote shares even when requested to do so. Do you agree with the AIC ‘s solutions and that it should be mandatory for platforms to notify investors about voting rights unless they opt out? Also, should this become part of Consumer Duty?
Ben Conway, Head of Fund Management & CIO at Hawksmoor Investment Management commented: “I am fully supportive of the AIC’s campaign here. It should absolutely be part of Consumer Duty that platforms play a greater role in enabling shareholder engagement. In fairness to some retail platforms, their business models enable very low-cost custody and trading of investment trust shares. We should not necessarily expect costs to stay as low if more demands are made on them. It is not just retail platforms to blame. Some institutional platforms simply charge far too much to enable voting and it would be healthy if a light was shone on pricing practices there.”
Peter Walls, Fund Manager of Unicorn Asset Management, said: “All in favour of all shareholder voices being heard but not so keen on mandating. Following the unbelievable damage wrought by the cost disclosure fiasco over the last 5 years I strongly believe that Investment Companies should continue to abide solely by the existing rigorous listed company rules and there is no justification for becoming embroiled in Consumer Duty legislation.”
Peter Hewitt, Fund Manager for CT Global Managed Portfolio, commented: “Yes, it should most definitely be mandatory. Shareholder voting rights are incredibly important when it comes to running a trust, they can decide the future of it, as we have seen from the voting results of Saba’s proposals. From my experience, Interactive Investor is one of the best at this. When it comes to your voting rights, they contact you immediately when a vote is about to take place and provide all the necessary details. The importance of voting rights cannot be overstated.”
It seems that the investment trust sector is united in its response to Saba’s campaign against the UK investment trust industry and on ways to improve the sector that does not include ousting the Board of several respectable investment trusts.
It will be interesting to see how Saba fares in its Mind the Gap campaign. But what is clear to see is that Saba Capital is here to stay in the near future.
McKinley Sadler is a Senior Account Executive at Quill PR.
Several Quill clients were successful at the recent Investment Week 25th Investment Company of the Year Awards 2023, in association with the AIC, at an awards ceremony in London.
The awards recognise managers which have delivered consistently for investors across a variety of sectors.
The shortlists for the awards were constructed using scores provided by the AIC, using Morningstar data. Investment companies needed a three-year track record to 30 June 2023 to be shortlisted and a market cap of £50m or above.
Within each sector, companies had their cumulative fair NAV returns calculated over three discrete periods in sterling terms. Returns over the 12 months to 30 June 2023 were given a 40% weighting, the 12 months to 30 June 2022 were given a 30% weighting, while the 12 months to 30 June 2021 accounted for 20% of the overall score. The final 10% weight was given to the full cumulative NAV return over the three years to 30 June 2023.
These scores were added to give a single score out of 100, the highest of which were considered for the shortlists. Winners were then chosen by a judging panel comprised of IFAs, wealth managers, fund managers and analysts considering qualitative as well as quantitative factors.
Odyssean Investment Trust (OIT) won the UK Smaller Companies award. Alliance Trust (ATST) was the Global award winner and AVI Global Trust (AGT) was highly commended in the Global award category.
Investment Week said: “Against a challenging backdrop, our judges this year were keen to highlight consistent performers who have managed to navigate turbulent market conditions. Discount management was a major focus this year, as well as effective communications with investors and use of the investment company structure.”
Photo: Gregor Stewart, Chairman of Alliance Trust, and Craig Baker, WTW’s Chief Investment Officer, receiving the award
The march of AI or artificial intelligence is truly upon us, highlighted by the fact that as I type, my keyboard is predicting what I am going to type next, and is often correct. Gosh, so predictable!
At an extremely interesting client presentation recently, fund managers from the Sanlam Artificial Intelligence fund explained to us that “Things that people called ‘pipe dreams’ when the fund was launched in 2017 are now happening. The changes have been utterly extraordinary. What was impossible is now possible.”
A fascinating timeline showed how algorithms have achieved superhuman levels in chess and other games such as Go in a very short space of time, and how AI platforms were teaching themsleves to walk, create their own languages and understand human vocabulary at an increasingly exponential speed.
There’s no doubt that changes brought by AI within healthcare, agriculture, transport (to mention a very few) are literally saving lives and may help to save the planet.
However, the very night after this event, I was reminded about the limits of AI in the arena of customer service. One area where chatbots and robots haven’t quite nailed the human touch yet.
My teenage daughter and her friend had arrived at a hotel in Portugal late at night, to be told that their room booking had been cancelled by the online booking service they’d used months earlier. This was human error (or greed) on the bookings service part, no robots at fault there. However, her booking was confirmed so a bit of a disagreement ensued but as the hotel was now full, she needed to contact them as they now had nowhere to stay. So then she (in Portugal) and I (in London) tried to communicate with the bookings company to get the issue sorted. We both experienced the same fate…
The phonecall was answered clearly by a robot – who requested the confirmation number. That was easily done. There then ensued some fake typing noise, I suppose to suggest that someone was actually typing into a computer to check something out, before a robotic voice informed that they had been waiting too long for our information and would have to end the phone call. At gone midnight – and having gone through this process twice I was definitely not impressed. The situation was not resolved until the following day – and took human intervention via twitter direct messaging to sort out.
While AI is clearly the future, companies should beware that they are not jeopardising their hard-won reputations for short-term cost savings. The message is that the nuances of real life problems often need to be resolved by humans; and human customers are not happy when they have to battle with companies’ attempts to deflect issues to our robot brethren, before they are quite ready.
Photo by Alex Knight on Unsplash
Quill PR is pleased to announce a new member to the team, with the hire of Stephanie Spicer as Head of Content.
Steph has worked as a personal finance and investment journalist for over 20 years. She has held senior editorial positions on various industry titles. These include Money Management, Investment Week, Cover and Corporate Adviser. Most recently she has freelanced for What Investment Magazine and What Investment online. She has also acted as a PR consultant for the best part of two decades.
Sam Emery, Quill Managing Director, said: “We are delighted to have Steph on board. Her role is to continue developing the content writing service Quill offers to clients. As our client base grows so does the need to fulfil clients’ requirements for quality copy and get clients’ messages out to their relevant audiences.”